Evercise 3 (LO 4) Allocating profits and losses. Johnson, Larson, and Kragen own

Question

Evercise 3 (LO 4) Allocating profits and losses. Johnson, Larson, and Kragen own an dvertisingagency that they operate as a partnership. The partnership agreement includes the following: a. Johnson receives a salary of $50,000. b. Larson receives a salary of $60,000. . Kragen receives no salary but a bonus equal to 10% of income after the bonus. d All partners areto receive 10% interest on their average cap ital invested. The average capital balances are $40,000, $25,000, and $145,000, respectively, for Johnson, Larson, and Kragen. Any residual amounts of profit are to be divided equally between the partners. 2. Determine how a loss of $34,000 would be allocated assuming a priority system for allocat- ing losses is not followed. 3. Determine how $132,000 of income is allocated among the partners assuming t stem: income should be allocated by first giving priority to salary, then bonus, priority sy then interest on invested capital, and then according to the profit and loss percentages.

Explanation / Answer

Answer:1

$14,500

Note-1:

Calculation Kragen's Commission @10% of income after the bonus = $220,000*10/110 = $20,000.

Note-2:

Interest Calculation:

Johnson = $40,000*10% =$4,000

Larson = $25,000*10% = $2,500

Kragen = $145,000*10% = $14,500

Answer:2

Assuming that priority system for allocation is not followed, the loss of $34,000 will be distributed on the basis average capital i.e.19%, 12% & 60% and the amount of loss distributed is $6,460, $4,080 & $23,460 respectively to Johnson, Larson & Kragen.

Answer:3

Johnson

Larson

Kragen

Total Income

$132,000

Less:

Salary

$50,000

$60,000

-

$110,000

$22,000

Less:

Bonus ($132,000*10/110)

-

-

$12,000

$12,000

$10,000

Interest by % of Capital (19%, 12%& 69%)

$1,900

$1,200

$6,900

$10,000

Particulars Johnson Larson Kragen Total Johnson's Salary $50,000 - - Larson'Salary $60,000 Kragen's Comission (Note-1) - - $20,000 Interest on Capital (Note-2) $4,000 $2,500

$14,500

$54,000 $62,500 $34,500 $151,000 Remaining Profit Allocation ($220,00-$151,000 = $69,000) $23,000 $23,000
$23,000
$69,000

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